A behavioural economic analysis of agricultural investment decisions

Farmers in developing countries operate in extraordinarily difficult environments. Policies that aim to increase agricultural productivity, for example agricultural lending, research and extension, rural infrastructure and crop insurance, need to take into account how farmers make agricultural investment decisions. However, crucial elements of their decision-making habits that relate to risky choices are not well understood.

This research project took place in east Uganda, and aimed to advance the understanding of how farmers who face numerous threats to their livelihoods take risky investment decisions. Participants responded to real monetary incentives to identify the significant features of their decision-making habits. Firstly potential biases in risky choice behaviour were studied by using lotteries to measure whether certain risks tend to be exaggerated (or alternatively, downplayed) in participants’ minds. Secondly the influence of social interaction on risky choice behaviour was studied.